Aussie Dollar Falls as Slowing Growth Stokes RBA Rate-Cut Bets

Australia’s dollar dropped after a government report showed growth slowed to the least in almost two years, fueling expectations the Reserve Bank will cut borrowing costs.

New Zealand’s dollar advanced against the Aussie for a second day after the Organization for Economic Cooperation and Development said the smaller nation will need to raise interest rates later this year. The Australian currency extended its biggest slide in seven weeks versus the greenback amid speculation the U.S. Federal Reserve will taper stimulus.

“When the weakness of Australia’s domestic demand is highlighted just like today, people can’t shake off the possibility of an additional rate cut,” said Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co. “The Aussie’s over-valuation can be seen in various indicators.”

Australia’s dollar dropped 0.8 percent to 95.74 U.S. cents as of 5:04 p.m. in Sydney after sliding 1.2 percent yesterday, the most since April 15. It weakened 0.5 percent to NZ$1.1975. The kiwi declined 0.4 percent to 79.86 U.S. cents.

The Aussie fell 1.3 percent to 95.24 yen, the weakest since March 5. New Zealand’s currency declined 0.8 percent to 79.57 yen.

Australia’s gross domestic product expanded 2.5 percent in the first quarter from a year earlier, the statistics bureau said today. It’s the slowest pace since the period ended June 2011 and compared with the 2.7 percent growth estimated by economists in a Bloomberg News survey.

RBA Outlook

The Reserve Bank of Australia kept the overnight cash-rate target at a record-low 2.75 percent yesterday, saying the inflation outlook may provide some scope for further easing if needed. The exchange rate “remains high considering the decline in export prices that has taken place over the past year and a half,” RBA Governor Glenn Stevens said in a statement.

The Aussie is third-most overvalued against the U.S. dollar among 12 major currencies, according to data compiled by the OECD. It’s 29 percent stronger than the estimated value based on gaps in consumer prices among different countries, compared with the kiwi’s 16 percent overvaluation, the OECD figures show.

‘Economic Slack’

New Zealand’s currency climbed earlier against most of its major counterparts after the Paris-based OECD said in its biannual survey of the nation that “economic slack” will dissipate over 2013 to 2014 and, as inflation pressures emerge, monetary stimulus should then be gradually removed.

The Reserve Bank of New Zealand kept the official cash rate at an all-time low of 2.5 percent in April.

In the U.S., ADP Research Institute will probably say today the pace of hiring quickened by 46,000 jobs to 165,000 in May from the previous month, according to the median estimate of economists surveyed by Bloomberg News. Fed Bank of Kansas City President Esther George urged the U.S. central bank yesterday to reduce its $85 billion in monthly bond buying.

“The talk about U.S. quantitative easing possibly ending or being tapered -- that’s really put downward pressure on the Aussie,” said Janu Chan, a Sydney-based economist at St. George Bank Ltd.

The yield on Australia’s benchmark 10-year government note fell five basis points to 3.39 percent.

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